Stage Fright

L.A. promoter Live Nation was to be Ticketmaster’s big challenger. Funny how plans change

The first thing to understand about the concert business is that it’s not what it seems. Ticketmaster may be an easy company to hate, but it cannot be blamed for charging $150 to see Britney Spears perform at the Honda Center in Anaheim this month. Britney, or at least her people, set the prices (Ticketmaster and the concert promoter share the service fee proceeds). She also will take home the bulk of the box-office gate—typically around 90 percent.

Artists get away with such windfalls because without them, there would be no show. That puts pressure on the concert promoter, the ticket seller, and the venue operator (sometimes they’re one and the same) to dream up alternative ways of making money. Otherwise, they get squeezed. One more thing to understand: Everybody acts like a tough guy. “The music business is a thug business,” says Bob Lefsetz, who writes a widely read music industry blog. “The touring business is thug squared. It’s all about intimidation. It’s about tribal loyalties.”

No surprise, then, that the proposed merger of Ticketmaster, the world’s biggest ticket agency, and Live Nation, the world’s largest concert promoter, has caused such an uproar. If approved by regulators (and that’s a big if), the deal would create the most powerful and influential company in the history of the music business. It could also turn into a mess. Both businesses represent a maze of moving parts: promoters, artists, venue operators, ticket sellers, corporate sponsors, T-shirt peddlers, fan clubs. The trick is getting them to operate efficiently and in the best interest of consumers, artists, and investors. History is not on the side of Live Nation Entertainment, as the new company will be called. Megamergers rarely deliver on their press release hype.

Citigroup and Travelers were going to revolutionize the financial services business, AOL and Time Warner would dominate the worlds of old and new media, and Sprint and Nextel were expected to build, in the words of the CEO at the time, “strength upon strength.” Not only did none of that happen but the acquiring companies wound up permanently scarred. Mergers don’t work for many reasons—clashing cultures, unexpected expenses, and legal delays, among them. The worst snags can come from the folks doing the deals. They might get too excited about building an empire or become convinced that it’s a good thing for investors because of the illusory efficiencies (in this case, supposedly $40 million within a year after the deal closes).

Most befuddling is that until recently Live Nation and Ticketmaster were said to be warring camps—two companies that had staked out different ends of the music business and within the last year began moving into each other’s turf. Soon after the deal was announced, however, Live Nation chief executive Michael Rapino and Ticketmaster chief executive Irving Azoff—the longtime music manager who was brought on four months earlier—started talking like they were old pals. Rapino says he wants to form a company of the future, while Azoff likens the deal to the music industry’s version of an economic stimulus plan that would result in lower ticket prices.

Considering that ticket prices have not fallen since 1996, his assurances are a little suspect. There’s also the matter of customer service: A recent Ticketmaster glitch involving the Bruce Springsteen tour inadvertently directed fans to a resale site where tickets were listed at several times their face value. A couple of days earlier, Live Nation’s computers suffered a major overload as customers wanting to buy tickets for Phish’s reunion tour were met with error messages, lengthy waits, and transactions that didn’t go through. Both companies insisted that the miscues were much ado about not much, but they fed into a long-running perception that ticket sellers were out to rook concertgoers. Springsteen himself posted an apology on his Web site and warned that a Live Nation-Ticketmaster combination would be bad for fans.

The irony is that the concert business has been doing well—certainly better than the rest of the music business. CD sales last year plunged 20 percent from a year earlier, record stores are practically extinct, and ad revenues at L.A.-area radio stations are expected to drop 10 percent in 2009 as more people switch to MP3 players. That leaves live entertainment, whose box-office receipts in 2008 climbed almost 8 percent from the previous year, despite the total number of ticket sales for the 100 top-grossing shows falling 3 percent. Higher ticket prices made up the difference. In fact, the average ticket price in North America jumped from $25.81 in 1996 to $66.90 in 2008.

“We feel confident that even in a terrible economy we have a product that fans are passionate about,” Jason Garner, Live Nation’s chief executive of global music, told me at the company’s warehouse-chic offices in Beverly Hills, formerly the home of Madonna’s Maverick Records (Ticketmaster is based in West Hollywood). After canceling and then rescheduling a long-planned interview two days before news of the deal was leaked to the press, Garner kept to a familiar script: Concertgoing, he said, “is still the cheapest form of that level of entertainment—cheaper than going to the theater or sitting courtside at a basketball game”—and true fans are willing to shell out two or three hundred dollars to see the Eagles or Elton John.

He has a point. Live concerts cannot be duplicated, which is why superstar tours generate the big bucks. Madonna had the top-selling tour of 2008, grossing $105.3 million in the United States, according to Pollstar. The Rolling Stones, who are expected to hit the road at the end of the year, will likely shatter records, recession or no. This is the juice of the industry: aging acts going after well-heeled boomers. The question is whether the people who sell the tickets, promote the tours, and market the merchandise can survive after the audiences and the bands start collecting Social Security. Entertainment lawyer Jay Cooper, whose clients include James Taylor and Sheryl Crow, has a two-word answer: “They can’t.”

At the beginning of the year, as groups were preparing their spring and summer tours, managers started asking promoters for minimum revenue guarantees in case ticket sales stalled. Already artists who would have easily sold out a year or two ago are performing in front of empty seats. Near-term, Cooper anticipates some adjustments. “I’d rather work in a 6,000-seat venue and turn away 1,000 people than work in a 10,000-seat arena and have 4,000 empty seats,” he says. “Everything is perception.”

Going back 30 or 40 years, the concert business was made up of individual promoters who booked dates for their particular city or region. Groups were given a flat fee, leaving the promoter to collect on the gate. Jeff Dorenfeld, who teaches music management at the Berklee College of Music in Boston, says that in the late 1960s, tickets to a Janis Joplin and Jimi Hendrix concert at San Francisco’s Fillmore Auditorium were as low as $3. “Eventually artists came to realize that people were coming because of who they were,” says Dorenfeld. “They started to demand more.”

The business was revolutionized in the 1990s by entrepreneur Robert Sillerman, who figured that buying out local promoters would enable him to consolidate the touring industry and sell sponsorships and advertising on a national basis. Through his company, SFX Entertainment, Sillerman transformed concerts into marketing machines for everything from Smirnoff to Levi’s. In early 2000, he sold SFX, by then the nation’s largest concert promoter, to radio giant Clear Channel Communications for $3 billion. The San Antonio-based company had trouble making the concert operation work, however, so as part of a larger restructuring in 2005, it was spun off to form Live Nation. Rapino became CEO and moved everybody to Beverly Hills.

A onetime marketing executive in Canada, Rapino has shown an ability to inhabit both the corporate and creative worlds. With his black leather jacket and rock-star stubble, he likes to hang out at L.A.’s House of Blues, one of more than 100 venues that the company owns, leases, or operates. Jay-Z and Kanye West are regulars at the Live Nation offices. The way Rapino sees it, music is being consumed by more people than ever. “The cell phone has enabled people from India to Dubai to the corners of the world to listen to music,” he told analysts during an investment conference in Phoenix. “You don’t have to create consumer demand—you just have to monetize the execution of the consumer demand.”

Translation: Make more money. Still, with artists in control of the box office, the company is left with a hodgepodge of smaller revenue streams, such as corporate sponsorships, a percentage of the ticket service fees, and ancillary sales from beer, hot dogs, T-shirts, and parking. The Live Nation folks call it “filling the pipe,” a low-margin business that has obvious limitations. Indeed, the company has lost money in each of the years since it spun off from Clear Channel.

But what if the company essentially took over an artist’s career—promoting concerts as well as producing the records, merchandising the T-shirts, arranging the Web operations, and orchestrating the endorsements or outside business ventures? In return, the artist would receive gobs of cash and stock. This is the premise behind a long-term, all-inclusive business relationship known as a 360 deal. “We guarantee artists money. They perform, we take a piece of the gate, and hopefully that piece justifies what we invested,” says Garner. The 360 deals have received lots of attention because the numbers are so huge: Live Nation is paying Madonna $120 million and Jay-Z $150 million, both over several years. Others, such as U2, agreed to more limited terms.

Wall Street doesn’t much care for these arrangements because they’re too risky for a business that’s so transient (tours rarely go beyond 12 or 18 months). In an embarrassing moment late last year, Live Nation was forced to fork over $19 million to U2 to make up for the lost value of stock that the group received as part of its 360 deal. No biggie, says Garner, but naysayers jumped on the payout as another reason the concept is flawed. “Probably too much was made of 360 deals being the future of the company,” he admits.

If nothing else, the agreements illustrated Live Nation’s lofty ambitions and set in motion a kind of arms race with Ticketmaster, which for years had been under the aegis of Barry Diller’s crazy-quilt collection of businesses called IAC (previously known as InterActiveCorp and before that as USA Networks). Ticketmaster’s ingenious business model, hatched in the 1980s by then-chief executive Fred Rosen, offered promoters a percentage of the service fees that had been added on to the price of a Ticketmaster ticket. In return, promoters gave Ticketmaster the exclusive right to sell tickets for particular events at particular venues.

The company has weathered numerous antitrust charges, including a tussle with the group Pearl Jam in the 1990s that the Justice Department reviewed before dropping. But Ticketmaster showed vulnerability on two fronts. One was in the fast-growing secondary ticket market—basically a legal form of scalping, in which the ticket seller splits a commission with a Web site that facilitates the transaction. The other was the roughly 20 percent of its revenue that came from ticketing for events that Live Nation was promoting—money that Live Nation wouldn’t have to pay to Ticketmaster if it sold its own tickets.

So when the contract between the two companies expired at the end of last year, Live Nation launched an online ticketing service. Around that time, Ticketmaster entered a new arena as well: the business of managing artists. Not just any artists but superstars represented by Azoff’s Front Line Management firm (the Eagles, Christina Aguilera, and Neil Diamond, to name a few). How exactly Ticketmaster would exploit those relationships was not spelled out, though it didn’t have to be. Azoff was an influential player in the music business, and the acquisition of his firm meant that as with Live Nation, Ticketmaster was spreading its wings. In a telling shift, the name was changed to Ticketmaster Entertainment.

That was last October. Then, after Rapino and Azoff started talking, the whole thing changed. When trying to follow what happened, it’s best to consider Diller, another formidable boardroom personality, who would be chairman of the new company. The Web-based amalgamation that’s envisioned—linking a customer to concert tickets, merchandise, fan clubs, and CD sales on a single site—is similar to what he had been trying to do at IAC going back a decade or more.

Diller wanted to connect companies he had major stakes in—Ticketmaster Online-Citysearch, Hotel Reservations Network, Home Shopping Network, and others—into a catchall shopping and entertainment experience. Buy a ticket to a Clippers game and then get directed to restaurants near Staples Center and an NBA store where Clippers jerseys are sold. All those choices become part of a database that tracks favorite teams, merchandise, and so on. In 2000, Diller told me that such a platform was a “unique way of approaching the future,” even if he allowed that “it may be a crackpot idea.”

Actually such cross-marketing was a nifty idea, but it never quite worked out. Last year Diller decided to jettison several of the companies, including Ticketmaster. Asked why, he told The Wall Street Journal, “I thought the company was overly complex and unmanageable. What I’ve learned over the years is that focus and singular purpose is the best approach for businesses.” When running a public company, he added, “be absolutely certain of what the parameters are, what the clarity is, and that you can explain it to yourselves and explain it externally.”

Live Nation Entertainment is being formed differently from IAC—in two large corporate chunks as opposed to piecemeal—and to Diller’s point, with a lot more clarity (one business that crosses into other related businesses). Even so, creating a monster concert company does nothing to address the music industry’s biggest challenge: persuading consumers to purchase CDs instead of ripping them off through the Web.